The Hindu Business Line, November 03, 2013
By Pradeep S Mehta and Amol Kulkarni
The political class’ cavalier approach will cost us dear
The Finance Minister has repeatedly asserted that India’s current account deficit and fiscal deficit will be limited to $70 billion and 4.8 per cent of the GDP, respectively, during the current fiscal. While the former seems plausible on the back of recent policy revisions, decline in imports and growth in exports, the latter seems difficult, especially seen in light of the government’s past performance.
Current account deficit is the excess of imports over exports of a country. Fiscal deficit is the excess of total expenditure (capital and revenue) by the government, excluding repayment of debt, over total receipts, excluding debt receipts (capital and revenue). Revenue deficit is the difference between revenue expenditure and revenue receipts.
With a view to managing the fiscal and revenue deficit targets, the Fiscal Responsibility and Budget Management Act (FRBMA) was enacted in 2003. Corresponding rules were also drawn up.
The FRBMA, in its original form, envisaged eliminating revenue deficit and reducing fiscal deficit to 3 per cent of GDP by 2008. It gave an impression that the government was serious about adopting prudent fiscal management practices and ensuring fiscal discipline.
While eyebrows were raised in 2004 when the deadline was pushed to 2009 without any hiccup in Parliament, the government’s intentions could still be trusted
Eventually, in 2009, all hopes were shattered when the revenue and fiscal deficits were recorded as high as 4.67 and 6.21 per cent, respectively, of GDP. The government took shelter behind the expenditure on account of fiscal stimulus, necessitated by the global financial meltdown, for missing the fiscal targets.
However, a closer look at government spending suggested a different story.
The year-on-year increase in food and fertiliser subsidies during 2008-09 was 40 and 136 per cent, respectively. Many experts, including the 13th Finance Commission, demolished the government’s case and established that the fiscal stimulus was not solely responsible for non-compliance with deficit targets, and pay revision, farm debt waiver, and food and fertiliser subsidies added substantially to the fiscal burden.
It must be noted that 2009 was also an election year. Such populist measures do not serve the country well in the long term.
The FRBMA provided that no deviation from the targets could happen without approval of Parliament. The targets could be exceeded only in case of national security, national calamity and other such exceptional grounds as specified. Further, in case of a deviation, the finance minister was required to suggest and implement remedial measures to increase revenue and reduce expenditure.
From 2009 to 2012, the government was in continual non-compliance with FRBM targets. Never did it manage to eliminate revenue deficit or reduce fiscal deficit to 3 per cent of GDP.
The justifications provided in the name of fiscal stimulus and financial meltdown continued for around four years and not even once was there an attempt to block approval of deviations in Parliament.
However, what transpired post-2012 is even more surprising and deeply disturbing.
DILUTION OF TARGETS
Following the Budget speech for 2012-13, certain amendments to the FRBMA were introduced that postponed attaining the fiscal deficit of 3 per cent of GDP by 2017, and targeted achieving revenue deficit of 2 per cent GDP by 2015.
Consequent amendments were made to the rules in May 2013. This meant substantial dilution and deference of the deficit targets. The 13th Finance Commission had laid down a fiscal road map and suggested certain amendments to the FRBMA such as reforms in mid-term statements, elimination of revenue deficit by 2015 and explanation of shocks requiring relaxation of targets. None of these were accepted.
The amendments to FRBMA were passed again without a glitch. Any deliberations on the proposed amendments could have highlighted that they ratified fiscal malpractices of the government, and need substantial overhaul.
India is not alone in being nonchalant about deficit targets, but surely it could have devised a more intelligent plan to adhere to fiscal discipline. Countries such as Germany, Switzerland, Slovenia and Spain, among others, have learned from their mistakes and adopted a ‘balanced budget’ principle, which requires structural balances on a yearly basis and absolute balances over thecourse of a business cycle.
So, an expansionary fiscal policy during recession is required to be balanced with savings during good times. The EU policies prescribe stringent review and monitoring for fiscal practices of member states and even provisions for penalties in case of non-compliance.
There is no dearth of best practices for fiscal management. The Indian legislature just needed to look around and localise such policies. However, in the haste to sanction its imprudent practices and cover up its misconduct, the government has decided to inflict long-term pain on the economy.
The absence of a vigilant opposition to formulate a workable solution that avoids long-term pain is a problem as well. Even civil society is at fault for not questioning the government. High fiscal deficits heighten inflation, increase the risk of external sector imbalances and dampen private investment, growth and employment.
As 2013 and 2014 are election years, it would be nearly impossible for the government to comply with the deficit targets. A preview is already available in the form of its first five months’ performance, during which time fiscal and revenue deficits have reached 74.6 per cent and 87.4 per cent of the year’s target, respectively. Thus, it would be a challenge for the Finance Minister to keep his promise.
Mehta is Secretary-General and Kulkarni a policy analyst, CUTS International
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